Banks' Billions in Overdraft Fees Seen Dodging Tough U.S. Rules

U.S. banks are poised to score a victory in their fight to keep regulators from pinching the billions of dollars in fees they charge consumers who overdraw their accounts.

After studying overdraft fees for more than three years, the Consumer Financial Protection Bureau is leaning against subjecting banks to tough new rules that would cap the size of charges or limit how frequently they can be imposed on consumers, said two people briefed on the agency's work.

More likely, when the CFPB proposes regulations later this year or in early 2016, it will probably bar lenders from reordering transactions in a way that triggers overdrafts and also require better disclosure of policies that allow consumers to avoid the fees, said the people who asked not to be named because the agency hasn't finalized its rules.

The new regulations the CFPB is considering would probably disappoint consumer groups, which have railed against overdraft fees as abusive with examples of $5 lattes suddenly costing more than $40. The charges amount to a short-term loan -- though with interest rates exceeding 4,000 percent -- when debit-card transactions push customers' account balances below zero.

"The unfair, deceptive and abusive nature of bank overdrafts calls for deliberate, strong action by the CFPB," said Sarah Ludwig, co-director of the New Economy Project, a New York advocacy group.

Moira Vahey, a CFPB spokeswoman said the agency is "carefully weighing what consumer protections" are needed on overdrafts.

"No decisions have yet been made," Vahey said in an e- mail. "We will continue our work to understand and address practices that put consumers at risk, and are committed to a fair and open process."

Overdraft fees have been a focus at the CFPB since the regulator's creation under the 2010 Dodd-Frank Act. The agency named its first softball team "The Overdrafts" and in 2012, in one of his first actions as the agency's director, Richard Cordray initiated a far-reaching review of the charges.

As the CFPB dug into the issue, banks deluged the agency with arguments that consumers actually like being able to overdraw their accounts. And while JPMorgan Chase, Bank of America and Wells Fargo generate the most fees, the fiercest lobbying has come from small banks that say the revenue is crucial to their survival. Community banks have clout with U.S. lawmakers, many of whom have dozens of small lenders based in their congressional districts.

"There would be a fierce backlash if the CFPB gets too prescriptive here, and that would play badly in Congress," said Camden Fine, chief executive officer of the Independent Community Bankers of America, a Washington-based industry group.

Fine said he has warned the CFPB that overdraft fees help support branch networks, which could be at risk from stringent regulation.

Vahey, the CFPB spokeswoman, said that the agency wants to "fully understand the overdraft practices at banks and credit unions of different sizes, a goal that has been encouraged by small institutions."

The U.S. banking industry is on pace to collect more than $10 billion of the fees this year, with JPMorgan, Bank of America and Wells Fargo each generating more than $350 million of revenue from the charges in the first quarter, according to SNL Financial. Regulators require banks with more than $1 billion of assets to disclose their overdraft revenue.

Perhaps undercutting the need for tough CFPB rules is that analysts at Jefferies say the revenue is declining.

The Federal Reserve required in 2010 that customers agree to overdraft protection before banks can apply it to their accounts. Unless consumers opt in, any transactions that would lead to a negative balance are declined.

That regulation, and the fact that customers can now easily check bank balances through smartphone apps, has eroded earnings, Jefferies' analyst Ken Usdin and his colleagues wrote in a report last month. They also concluded that the revenue is less critical for banks than it was almost a decade ago.

Overdraft fees made up 2 percent of banks' revenue and one- third of service charges in the first quarter of this year, down from 6 percent of revenue and two-thirds of service charges in 2006, according to Usdin's report. That's played out even though the median penalty assessed for overdrawing an account has risen 33 percent to $36 over the same time period.

One option the CFPB is considering would try to improve disclosure of opt-in policies, as studies by consumer groups have shown banks may not make it clear enough that customers can decline overdraft protection and avoid fees, the people said.

Another would govern the order in which banks process transactions, the people said. Since 2011, Bank of America, JPMorgan and Wells Fargo have had to pay hundreds of millions of dollars to settle lawsuits that accused them of manipulating the order of debit-card transactions to boost overdraft fees.

Regulations in general could cut into bank revenue, the Jefferies analysts wrote, "but much depends on the types of changes."

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